Allowability of expenditure incurred by Pharmaceutical Companies on freebies to medical professionals

Whether Gifts, freebies, samples, benefits or amenities given to medical practitioners as Business/sales promotion expenses are allowable expenses under Income Tax act?

 

 

1) Section 37(1) disallows any expenditure which is an offence or prohibited by law not to be allowed as deduction.

2) The Indian Medical Council (professional conduct, etiquette and ethics) regulations, 2002, as amended from time to time, read with section 20A of the Indian Medical Council Act 1956, imposed a prohibition on medical practitioners and their professional associations from taking any Gift, Travel facility, Hospitality, Cash or monetary grant from pharmaceutical and allied health sector industries.

3) In Dy. CIT v. Macleods Pharmaceuticals Ltd. It was held that MCI Regulations does not come in the way of the pharmaceutical companies" extending freebies to the medical professionals, and, therefore, Explanation to section 37(1) [now Explanation 1 to section 37(1)] could not be invoked and, therefore, expenditure on freebies to medical professionals was allowable in the hands of assessee-company.

4) However, the Supreme Court in Apex Laboratories Private Limited ruled that when doctors are prohibited under the law from accepting gifts, pharma companies cannot defeat the objective behind the legal provision by arguing that donors have not been forbidden under the law from giving gifts.

5) The Supreme Court also noted that the agreements between pharma companies and the medical practitioners in gifting freebies for boosting sales of prescription drugs is also violative of Section 23 of the Contract Act because the consideration involved in such pacts are unlawful and opposed to public policy.

 6) Explanation 3 to Section 37(1) has been inserted by the Finance Act, 2022 which states payment of any benefit or perquisite by whatever form, to a person and acceptance of such benefits/perquisite by such person is prohibited under any law, rule regulation, guidelines, then such expenditure will not be allowed as a business deduction.

Henceforth, the expenses in the nature of gifts, freebies, samples, benefits, or amenities given to medical practitioners as business/sales promotion expenses will not be allowed under the Income Tax Act, 1961.

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CA Sanjay R Shetty

+91 77602 52581